OPINION: ‘Build, build, build’ borrowings can weaken economy

Jose Galang - Your Business

Posted at Jul 12 2017 08:06 PM

In moving to load up on large amounts of foreign debt to finance an overwhelming number of big-ticket infrastructure projects, the economic managers of the Duterte administration seem to be making the same mistakes committed by the Marcos dictatorship in the 1970s that eventually drove the economy into bankruptcy in the early 1980s.

The Marcos regime incurred huge amounts of foreign debt for its envisioned legacy infrastructure and big industrial projects, along with the development of local energy sources, by securing loans from Official Development Assistance (ODA) and the world capital markets, which at the time were overflowing with cheap “petrodollars” from oil exporting countries.

Never mind if domestic consumer prices were steadily increasing and the peso was nursing a period of devaluation, the dictatorship racked up foreign debts that pushed up total obligations from just $2.1 billion in 1970 and $3.8 billion in 1975 to an unprecedented $25 billion by 1983.

Crippling effects of a fallout from the 1982-83 Latin American debt crisis—when that region’s top economies Brazil, Argentina and Mexico started to default on the foreign debts they had secured in the 1970s to finance major infrastructure and industrialization projects—and from political tremors triggered by the assassination of opposition leader Benigno Aquino Jr. while in government custody, sent the Philippine economy into a severe recession.

Government as builder

Today, the Duterte economic team is aggressively pushing for a “Build, Build, Build” program that is estimated to be bankrolled by external borrowings of around $157 billion, the bulk of which is expected to come from China through its aid-giving Export-Import Bank. Japan is also being tapped for substantial amounts of ODA for this program.

As in the case of the Marcos debt-driven infrastructure program, the Duterte government will be securing the ODA and foreign loans for the planned projects. Until two months ago, major infrastructure projects were auctioned off to private investors under Public-Private Partnership arrangements. In the new scheme, the government will take care of building the roads, bridges, airports and railways and later bidding completed projects to private investors for their operation and maintenance.

In adopting the new strategy, labelled as a “hybrid PPP” approach, economic managers say this will speed up the construction of the projects in the “Build, Build, Build” program. Traditional PPP projects, they argue, take 29 months before work can start.

Still, under the hybrid strategy, it will still be the government that will take care of securing right-of-way clearances—the biggest challenge that usually confronts infrastructure projects—before the contractor breaks ground.

The hybrid scheme is described by economic managers as a strategy to sustain high economic growth that will create more jobs. But current plans also call for farming out the construction of the projects to foreign contractors that will be selected by governments that extend the ODA, and the hiring of laborers also from the countries that provide the ODA.

Finance Secretary Carlos Dominguez has disclosed that the China Eximbank will select the contractors that will build projects that it will finance. Budget Secretary Ben Diokno has also indicated that the government is “open” to hiring technical people and construction workers from China for these China-financed projects.

How “excluding” local contractors and labor tallies with the Duterte government’s pledge to make economic growth “inclusive” will need to be explained by the economic managers. Such a direction for “hybrid PPP” undertakings could dampen the spirit of entrepreneurship that is now undoubtedly fueling growth in many sectors of the economy.

Perhaps the Duterte economic managers can pick up a few pointers from Thailand on how to deal with China’s demands on the selection of project contractors and workers. Thailand officials announced this week they were able to get China to agree that in the case of a $5.5 billion railway project that will link Bangkok with a province in the kingdom’s northeast, Thai companies will handle the construction and hire local labor while China will provide railway technology, signal systems and technical training.

Lessons from crises past

Twenty years ago this month, economies in Asia got clobbered by a devastating financial crisis that resulted from a sudden increase in interest rates on loans that these countries had incurred previously.

Reflecting their dire financial positions, Southeast Asia’s economies at the time were recording larger current-account deficits in relation to their aggregate output (measured by the gross domestic product). Foreign funds were already financing these revenue shortfalls.

Prior to that situation, Southeast Asian economies were built up largely with the help of large pools of domestic savings (except the Philippines which relied on foreign funding). As these economies incurring large external payment shortfalls that needed to be financed with more foreign credit, international investors got unnerved and started to dump stocks and currencies from these nations.

During that time, however, the Philippines had just come from its own domestic financial crisis of 1983-85, which prevented it from further getting more foreign financing. It was under an austerity program while its neighbors were feasting on cheap foreign credit. Some analysts were saying at the time that the Philippines survived the 1997 Asian crisis relatively unscathed—mainly because it was already badly wounded in the mid-1980s crisis.

These days, analysts are getting antsy about potential difficulties when interest rates on funds secured from the world capital markets take a sharp upturn from their present “cheap” levels. 

Indeed, the newly minted governor of the Bangko Sentral ng Pilipinas, Nestor Espenilla, has issued an alert about “the seemingly imminent wind-down of ultra-easy monetary policies in advanced economies.” In a speech upon his installation as head of the Philippines’ central monetary authority, Espenilla noted that in 2016, “unexpected global events” escalated the level of monetary policy uncertainty and market volatility.

“We need to be mindful of such events and their potentially far-reaching consequences since these could undermine our economic performance and disrupt our carefully-laid plans,” he stressed.

Meanwhile, the Philippine peso exchange rate continues to show weakness. Against the US dollar, the peso now stands at levels last touched by the currency about 11 years ago. Stock prices remain volatile although footloose investments find their way into the local bourse from time to time.

The current account slipped into negative balance in the first quarter of this year, registering a deficit of $318 million as of March compared to a high surplus of $730 million a year ago. Also, increased outflows from the Bangko Sentral’s foreign exchange operations reduced the country’s international reserves marginally to $81.4 billion in June.

Still, the Philippine economy in general remains fundamentally strong—but weaknesses persist. Any surge in external borrowings to levels beyond the absorptive capacity could choke growth sectors and lead to serious issues similar to what the country experienced under Marcos.